Downing: Reaping rewards from LSE-listed Investment Trusts – offshore assets at big discounts

Veteran money manager Nick Downing specialises in a highly profitable niche – carefully selected global investment trusts from hundreds whose equity is listed on London Stock Exchange. In this fascinating interview, the founder of Overberg Asset Management explains his process, and how he can regularly acquire offshore assets at significant discounts. – Alec Hogg

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Relevant timestamps from the interview

  • 00:00 – Introductions
  • 00:48 – Nick Downing on starting his own business
  • 03:18 – Why he chose the town of Greyton to start his business
  • 04:42 – On moving to South Africa after graduating from Cambridge
  • 06:25 – On Overberg’s unique approach to investing and the London Stock Exchange
  • 10:03 – Why investment trusts are not popular in South Africa
  • 13:17 – On the ins and outs of investment trusts
  • 14:29 – On the success of Overberg Asset Management
  • 17:13 – How Downing and Overberg approach investment
  • 19:58 – On Overberg’s biggest holdings in the LSE
  • 22:49 – Concludes

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Edited transcript of the interview

Alec Hogg: Nick Downing is the founder, chief executive, and chief investment officer of Overberg Asset Management. But actually, we have a lot of history in the past. I’m not sure if you recall, but when you were working at Appleton, correct?

Nick Downing: Yes.

Alec Hogg: You sponsored the very first radio show in South Africa, which was my show on SAfm. It was called the Appleton Market Update.

Nick Downing: Yes, I remember it.

Alec Hogg: All those years ago. And then we lost touch because you left Appleton very shortly afterward and went off to start your own business.

Nick Downing: So, yes, that’s where I started. Well, thank you very much for inviting me to this interview. I really appreciate it. So it’s been a long time. In 2001, we took the decision, my wife and I and our two young children, to move to the Overberg. That’s why we called this company Overberg Asset Management.

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Alec Hogg: And I can’t ask you where the Overberg is because I actually also live there now, within the area.

Nick Downing: So the Overberg is that whole area that stretches from Hermanus all the way to Caledon and Grabouw, as well as parts of the Overberg like Greyton. Well, it’s the village. It’s a Theewaterskloof municipality. It includes the towns of Caledon and Grabouw. There’s so much investment required, and Grabouw and Caledon are the biggest funders of the budget. But you should come to Greyton one of these days, Alec. It’s full of potholes. Nothing’s working, and it’s a disgrace, really. It was the jewel of the Overberg. I think it still is, but it needs a bit of a shake-up.

Alec Hogg: The governance…?

Nick Downing: It’s the governance. It’s the budget allocation. The available budget goes to Grabouw for obvious reasons, because of the migration and lack of housing, but it comes from Greyton and gets siphoned off to Grabouw. I don’t mean to be complaining about this on the show; it’s not much to do with global markets.

Alec Hogg: But, but, my thinking is why? I can understand. I know very well why we have moved towards good governance in the Western Cape. I get much faster bandwidth here than I had in Johannesburg. I can work from anywhere in the world remotely. But what, 20 years ago, made you go to Greyton, which is far away from what one would have thought any kind of connectivity or bright lights?

Nick Downing: Well, that’s a very good question. There’s a company in the UK called Perpetual Asset Management, and they moved in the 1990s to Henley-on-Thames, miles away from the city of London, and that was my inspiration. I thought, if they can do it, so can we. We had Internet connection, or we did. Then it was a bit of the old dial-up connection, but it was enough to receive top research from London and elsewhere in the world. We were just a telephone call away from the stockbrokers in Johannesburg, Cape Town, and London. And really, the big reason is that the commute is about 500 meters. So I walk or cycle to work, leaving so much more time to focus on the important things like managing clients’ investments.

Alec Hogg: Warren Buffett lives in Omaha.

Nick Downing: Oh, another good example. And he’s been there forever. Forever. Yes.

Alec Hogg: That’s interesting. You came to South Africa from the UK. You were educated at Cambridge University, which for many South Africans is almost a pinnacle of education. You clearly had the world at your feet. Why come here?

Nick Downing: After Cambridge, I worked in London for five years with Nomura Securities, a big Japanese investment bank. Then I came to Cape Town to do an MBA. I have family from South Africa—my grandparents and parents are from here—and I’ve always loved the country. Initially, when I came to Cape Town to do the MBA, I thought it would be a brief stint. But like it happens to a lot of people, I’ve never left. Regardless of all its problems, I’m pretty sure I’d never leave South Africa. I love the people, the culture, the industry, and the fantastic entrepreneurial spirit. There’s so much potential.

Alec Hogg: And you bring something different to the investment market in this country, specialising in the offshore side and Overberg in London Stock Exchange-listed investment trusts. Yes. I’d love to find something different. Something that isn’t run-of-the-mill because there’s so much of that—people trying to be in the pack and not going out of the crowd. Your background in the UK, working at Nomura in both Japan and London, did that give you an insight that South African-based people might not have had?

Nick Downing: Investment trusts, also called investment companies or closed-end funds, trade on the London Stock Exchange—about 300 of them comprising the Footsie Equity Investment Index. They offer a great investment mechanism, providing investors with exposure to a global diversified portfolio in a very efficient and cost-effective way.

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Alec Hogg: Do they differ from unit trusts?

Nick Downing: Yes, unit trusts are open-ended, meaning they create a new unit when a new investor comes along and sell shares in the portfolio when an investor decides to redeem their units. On the other hand, closed-end structures like the investment companies we invest in have a limited number of shares in issue. When you buy shares, you need another seller, and when you sell, you need another buyer. As a result, the share doesn’t always trade at net asset value, unlike unit trusts. This can create opportunities and dangers for investors, requiring experienced professionals to manage such portfolios. However, it’s an excellent way to gain exposure to illiquid assets due to the daily trading facilitated by the London listing.

Alec Hogg: It’s surprising to me that investment trusts have gone off the radar in South Africa. In the past, during the 1969 boom and bust, investment trusts were quite strong here. There aren’t that many around anymore. But the way you’ve described it and the way I remember it, if you want to buy a unit trust, you pay full price, 100% of the assets. If you want to get something at a discount, you buy into a closed-end investment trust. As you say, now, they are trading at a discount of 16%. So we all like to buy a dollar’s worth of assets for $0.80, or in this case, $0.84. I wonder why they’re not popular in this country.

Nick Downing: So there are a couple of examples like Remgro. It’s a form of investment trust, right? Reinet is another one. I daresay they will become more popular in time, but both of those—Remgro and Reinet—trade at much wider discounts to net asset value than the 16 or 17% that I just quoted. That’s because they charge very high fees. Reinet, in particular, has a fee paid to the asset manager of anywhere between one and a half to 2%, and it follows a very passive management approach with just four or five holdings like British American Tobacco and Pension Corp. Not much activity is going on, so investors question why they should pay 2% for minimal activity, which results in the widening discount, currently standing at 32%. Another example is the U.K.’s Pershing Square, the Bill Ackman investment company, which is very good but also has a high expense for shareholders, paying a total fee of one and a half percent.

On the other hand, there are examples like Scottish Mortgage, well-known for having done incredibly well by spotting Tesla and other innovative shares a few years back. They charge a fee of only 30 basis points (0.3%) and have 30% of their portfolio invested in unlisted securities, which usually command higher fees. Surprisingly, Scottish Mortgage now trades at a discount of 20% to net asset value.

Alec Hogg: Do you own any in your hands?

Nick Downing: Yes, we do. Scottish Mortgage is one of our holdings, as well as Pershing Square and Rothschild Capital Partners. The latter has a 20 basis point fee (0.2%) and has shown an incredible track record since its founding in 1988, with the majority ownership held by the Rothschild family. So we have solid partners.

Regarding why investment trusts aren’t more popular in South Africa, I think they should be. With fewer shares available for asset managers to invest in on the JSE, the pool is shrinking, presenting a real opportunity for investment trusts.

Alec Hogg: And investment trusts aren’t limited to buying listed companies; they can invest in unlisted companies as well.

Nick Downing: Absolutely. They can invest in private equity, music royalties, absolute return hedge fund strategies, renewable energy infrastructure, and other alternative asset classes with poor liquidity. These types of assets are impossible to access through unit trusts due to their requirement for daily dealing, which creates liquidity mismatches. However, with closed-end investment companies, there is daily dealing on the stock exchange, making it an incredible way to gain exposure to these alternative asset classes.

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Alec Hogg: How have you and the investors in Overberg Asset Management performed?

Nick Downing: I believe we have performed very well. We’re not overly adventurous and follow a conservative investment approach. Over the long term—over 20 years—our annualised compound return on Sterling is about seven and a half per cent per annum. That’s quite impressive, considering the depreciation of the South African rand. We cater to a range of investors with diverse needs and risk appetites.

Nick Downing: We have a diverse range of clients, including large family trusts, young individuals who have sold their businesses and wish to invest, as well as retirees who have allocated a portion of their estates for long-term growth and income. These investment companies offer incredible dividend yields, making them attractive options for retirees seeking both growth and income. All our clients have private share portfolios, whether they are natural individuals or juristic persons. Each portfolio is bespoke, privately managed, and stands alone, allowing us to tailor it precisely to meet the individual’s risk profile, income needs, and growth targets.

Alec Hogg: It sounds like an interesting alternative to the mainstream approach. So, if I were to give you money and tell you I am a high-risk investor interested in investment trusts offering good discounts to net asset value, would you then build a portfolio for me that aligns with my risk appetite?

Nick Downing: Yes, that’s correct. We have model portfolios, including growth, balanced, and defensive options. We discuss with each client their risk preferences, showing them the historical performance, drawdowns, and potential risks of each portfolio. Our goal is always to under-promise and over-deliver to avoid dissatisfied clients. As an experienced investor, it wouldn’t be an issue for you, but not everyone is familiar with the investment landscape.

Alec Hogg: Your focus on the London Stock Exchange makes a lot of sense. Can you tell us more about the biggest holdings in the portfolio, such as 3i Infrastructure and 3i Group?

Nick Downing: 3i Group has grown significantly over the last few years, and we acquired it in 2019 when it was removed from a major index, causing ETFs to sell the share. It is a well-managed, listed private equity company—one of the largest globally—with a market capitalisation of around £18-19 billion. They invest in various sectors, including transportation, I.T., consumer services, and renewable energy. 3i Infrastructure, on the other hand, invests more in utilities and public-private partnerships across the UK, Europe, and the US. Their biggest holding is a company called Action, a successful non-food retailer in the UK and Europe, which has grown its sales and profits phenomenally over the years. 3i Group considers Action a compounder and runs winners, and it now comprises around 60% of 3i Group’s net asset value. As they are early-stage, high-growth companies, it is challenging to find such opportunities in the listed markets, but we have considerable private equity exposure in the Overberg portfolios, with 3i Group being the largest holding.

Alec Hogg: Thank you for joining us in our Cape Town studio. The world of investments is vast, and Overberg Asset Management provides valuable insights into the investment trust sector. I’m sure some investors will entrust you to manage their portfolios, while others may explore the opportunities offered by investment trusts on the London Stock Exchange, realising the vast potential within this sector.

Nick Downing: Thank you very much, Alec.

Alec Hogg: Nick Downing is the founder and chief executive of Overberg Asset Management, and I’m Alec Hogg at

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